How to Build the Cash Reserves You Need to Guard Against the Next Downturn

The building supply industry is a notoriously cyclical industry. But this can be used to your advantage. The reason is simple: companies that survived the Great Recession (and emerged in a good position to thrive) enjoyed healthy cash flow and prudent A/R management practices that buffered them against risk. That kind of positioning shows a discipline and focus that is the hallmark of the most-admired and successful companies.

The reason that these best practices are top of mind today is that after seven years of recovery from the Great Recession, the next cyclical downturn may not be too far in the distant future. Are you prepared?

You can prepare in several ways: prudence with new hiring, delaying speculative purchases and minimizing infrastructure investment. But the old adage “cash is king” should really be the guiding maxim for action today. Conservative business managers suggest that you should have three to six months of operating cash on hand at all times. That cash represents a hedge against unplanned expenses, which are inevitable in the life of any business. But more importantly, cash reserves can provide you with the edge you need to outlast less-prepared companies that might crash out in a down economy.

How do you improve cash flow management so you can build up a cash reserve? Here are four areas to focus on, all aimed at reducing risks and preparing for when even your best customers start going out 45 or 60+ days.